Search
High angle view of robots at work in a plant, GMC Truck Plant, Michigan, USA
Lawmakers in Michigan, home of many automotive factories, hope to boost business by eliminating the state income tax. Glowimages—Getty Images/Glowimages RF

The Latest State Moving to Kill Its Income Tax

Jan 13, 2017

There are currently seven states that levy no income taxes on residents. But that number could soon increase if some lawmakers have their way.

Michigan Senate Republicans began looking at proposals last week to repeal the state's 4.25% income tax, under the theory that doing so would attract an influx of residents and business dollars. “Michigan is still a tough place to do business and I think the more jobs you create, it sends off a more positive image of our state,” State Sen. Jack Brandenburg said to the Detroit Free Press. “It’s simple, the more jobs you create, the more people spend. The more people spend, the more jobs are created and there is more tax revenue for our state.”

Brandenburg and his Senate colleagues haven’t yet introduced their bill, but a similar measure was introduced this week by a Republican member of Michigan's House of Representatives, Lee Chatfield. "This is the people's money, not ours," House Speaker Tom Leonard said in a press release supporting the bill, according to MLive.com. "Michigan has turned a corner, our economy is booming, and there is even a budget surplus. I'm excited to join my colleagues, offer the best way forward, undo the mistakes of the past and return hundreds of millions of dollars back to the people who earned them in the first place."

If passed into law, the Michigan House measure would cut the current state income tax of 4.25% to 3.9%, effective in 2018 -- and then trim it by a tenth of a percent each year thereafter, until it was fully eliminated four decades from now.

Michigan is hardly alone in its call to eliminate state income taxes. In addition to the states where there already is no income tax—Alaska, Florida, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming—lawmakers in many other parts of the country have periodically pushed to get rid of them. Last summer, Tennessee—which already doesn't tax regular wages—approved a measure that would cut the investment income tax rate from 6% to 5% for the 2016 tax year, and then lowers it by one percentage point annually until it's gone by 2022.

Many other campaigns to get rid of state income taxes have failed to become reality, however. In 2013, then-Gov. Bobby Jindal of Louisiana introduced an ambitious plan to drop state income and corporate taxes and add higher sales taxes to make up for the lost revenues. The plan was never approved.

Political leaders in Arizona, Ohio, and Wisconsin have also recently engaged in high-profile pushes to slash some or all state income taxes.

Critics are quick to argue that moves to eliminate state income taxes ultimately cause harm to most residents because there is less money for things like building roads and supporting college students. What's more, when sales taxes are increased as the tradeoff for lower or no income taxes, the poor wind up paying a disproportionally higher amount in taxes as well.

"Taxes are one of the few things we’ve been told are socially acceptable to hate. Except that the idea that we could or should completely eliminate the income tax is not only nonsense, it is dangerous nonsense," Michigan Radio senior political analyst Jack Lessenberry said of the new bill in his state, which would see $9 billion in tax revenues disappear. "The state would literally not be able to function if the income tax were eliminated, and any major income tax cuts would make things worse for the majority of our citizens."

Lately, the so-called "Kansas Experiment" has been serving as a cautionary tale for states intrigued with the idea of cutting income taxes. Kansas Gov. Sam Brownback's ongoing "march to zero" income taxes, featuring a series of broad tax cuts for businesses and individuals, has resulted in repeated budget shortfalls. Kansas has also experienced slower job growth compared to neighboring states like Nebraska—where, by the way, there's still a state income tax but the governor wants to cut it.

All products and services featured are based solely on editorial selection. MONEY may receive compensation for some links to products and services on this website.

Quotes delayed at least 15 minutes. Market data provided by Interactive Data. ETF and Mutual Fund data provided by Morningstar, Inc. Dow Jones Terms & Conditions: http://www.djindexes.com/mdsidx/html/tandc/indexestandcs.html. S&P Index data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Terms & Conditions. Powered and implemented by Interactive Data Managed Solutions